Market Failure

Examining ways in which markets fail to allocate resources effectively.

Markets should work for people, not the other way around. When do we get to look at the system as the problem, and not just blindly blame every single person? Again, couldn’t any system work if people just acted the way you wanted them to in order for your system to work? At some point you have to look at a system that is no longer creating prosperity for its people or outwardly hurting them and change it, instead of punt kicking everything to “It’s their own fault” because you like the system. You start with the narrative that the system is perfect, and any challenge to that is an affront. But where does the premise that the system is perfect come from?

Democracy is often derided by some opponents as just two wolves and a sheep getting to decide what to eat for dinner. Tyranny by the majority. The solution, of course, is markatize! But how are markets any different? You also don’t have the choice to get what you want or need unless a lot of other people want it to. In essence, the “Vote” is a dollar instead of a person, in that the life and product you want won’t be delivered unless there is demand for it. The difference is, people can simply outvote you with more money. You are subject to the tyranny of consumer demand, and live in a world of aggregate market outcomes which you did not consent to – Poor working conditions, long hours, environmental damage, a lost sense of community, inequality, poverty, pollution, climate change. You didn’t sign up for that either. While people who lose elections say that the electorate doesn’t represent them because almost half the people can vote and still not be represented, far more things can take place in markets that don’t represent you that you cannot change.

Asymmetric Information

Monopoly

Speculative Bubbles.

An economic bubble (sometimes referred to as a speculative bubble, a market bubble, a price bubble, a financial bubble, a speculative mania or a balloon) is “trade in high volumes at prices that are considerably at variance with intrinsic values”. It could also be described as a situation in which asset prices appear to be based on implausible or inconsistent views about the future

Once a bubble begins, free markets can no longer be relied on to allocate resources sensibly or efficiently. By holding out the prospect of quick and effortless profits, they provide incentives for individuals and firms to act in ways that are individually rational but immensely damaging—to themselves and others. The problem of distorted incentives is, perhaps, most acute in financial markets, but it crops up throughout the economy. Markets encourage power companies to despoil the environment and cause global warming; health insurers to exclude sick people from coverage; computer makers to force customers to buy software programs they don’t need; and CEOs to stuff their own pockets at the expense of their stockholders. These are all examples of “market failure,” a concept that recurs throughout the book and gives it its title. Market failure isn’t an intellectual curiosity. In many areas of the economy, such as health care, high technology, and finance, it is endemic.

– How Markets Fail

2008 Financial Crisis

Conservative Talking Point: It was irresponsible people and poor people buying things they couldn’t afford, not the bankers, hedge fund managers, or traders. They were just trying to make an honest living.

Saying that it was poor people’s fault, or irresponsible people who couldn’t afford the mortgage doesn’t help your case one bit. It’s exactly the very thing that destroys the case Conservatives are trying to make.

Conservative ideology is largely predicated on the claim that markets operate best when left entirely to their own devices, without pesky government getting in the way. They don’t say Unregulated Markets work great…unless poor people ruin them. Motivated self-interest and rational division making in the pursuit of profit or value is supposed to, as the story goes, impel people to make decisions that provide value for everyone. The buyer gives the seller something she wants, and the seller buys a product the seller creates, and both parties are made better off than before, otherwise they wouldn’t have agreed to make the decision. Government, we are told, only gets in the way of this beneficial relationship.

Well, poor or irresponsible people buying things they cannot afford is actually a very specific kind of market failure…a reason why laissez faire economics does not work in the real world. People do not behave in perfect or rational manners described by the textbooks. When enough people make enough bad decisions, the result can be collectively bad outcomes. The invisible hand fumbles, and it wasn’t government that slapped it off course. It’s that in the real world, you have to have something keeping people collectively from going batshit crazy.

When you say poor or irresponsible people caused the housing crisis, you destroy the Conservative argument you are trying to make, and win the argument for liberals. Fine you’re right. Unregulated unfettered markets don’t lead to collective prosperity. They need the helping hand of law and government to create laws against decisions that lead to terrible outcomes.